Why The Bust For Offshore Drillers Might Last Another 2 Years

Statoil cancelled a contract for a drillship with Seadrill, which it had intended to use for drilling operations in the Atlantic, near Newfoundland. The cancellation is the second drillship contract to be terminated for Seadrill, coming shortly after Exxon canceled a contract for its drillship, West Capella, that had been dispatched off the Nigerian coast.

West Hercules, the Newfoundland drillship, was bringing in $445,000 per day for Seadrill, and it was supposed to continue to do so until January next year. Statoil, however, has decided to save some money and pay Seadrill some $61 million as compensation for canceling the contract. Revenues until January 2017 would have exceeded $90 million.

Things are not looking good for offshore drillers at the moment, and Seadrill is not the only one that’s had contracts canceled. Drillers have accumulated huge piles of debt and have been left with few ways of tackling it in an industry where everybody is thinking about cutting costs. What makes the downturn worse for these drillers is that they don’t have an alternative source of revenue, while major integrated E&Ps can rely on their downstream operations to support their balance sheet until prices recover and upstream operations rebound. Related: Clinton Chasing Votes With Fracking U-Turn

There’s gloom across the drilling world. Demand for drilling services is extremely weak. Although most industry leaders are still in the black, there are not enough new orders coming in to sustain these performances. Credit rating agencies are revising their stance on drillers downward, despite positive quarterly results, and some are forced to suspend dividends as a way to realize more cost savings. Bad news all around.

There is some good news, however. At least in the medium term, there will be a pick-up in demand for drilling services as existing fields are depleted and E&Ps are forced to look for new ones. Once prices start climbing back up, and demand begins to outstrip supply, drilling should return. Related: The Consequences Of $50 Oil

Estimates as to when this will happen vary from two to five years. With new oil discoveries at a 60-year low, and severe cut backs in spending assuring that exploration will remain moribund for the next few years, chances are that demand will inch up higher than supply sooner rather than later.

When this happens, the surviving drillers will get a new chance to thrive. Meanwhile, in a bid to guarantee their survival, some are betting on consolidation: Technip and FMC recently announced their planned $13-billion all-stock tie-up that should result in annual cost savings of up to $400 million. More deals like this could follow in offshore drilling as mergers and acquisitions have remained the only option for some embattled drillers.